131 final

Fraud is defined as failure to use reasonable care in the performance of services. T/F

FALSE

Most of the burden of affirmative proof is on the defendant under common law.
TRUE/FALSE

FALSE

The Ultramares v. Touche case held that auditors could be held liable to any
foreseen third party for ordinary negligence.
TRUE/FALSE

False

The Securities Exchange Act of 1934 offers recourse against the auditors to a far
greater number of investors than does the Securities Act of 1933.
TRUE/FALSE

True

The precedent set by the Hochfelder v. Ernst case is generally believed to have
increased auditors' legal liability.
TRUE/FALSE

FALSE

The auditors can be held liable for negligence in audits of financial statements, but not in reviews of financial statements.
TRUE/FALSE

False

The results of the Continental Vending Corporation case included the criminal
prosecution of auditors for gross negligence.
TRUE/FALSE

True

Most charges made against auditors under common law are criminal.
TRUE/FALSE

FALSE

The Securities Act of 1934 includes provisions for criminal charges against persons
violating the Act.
TRUE/FALSE

True

The use of engagement letters is generally designed to prevent lawsuits by third parties against the auditors.
TRUE/FALSE

False

A CPA issued an unqualified opinion on the financial statements of a company that
sold common stock in a public offering subject to the Securities Act of 1933.
Based on a misstatement in the financial statements, the CPA is being sued by
an investor who purchased shares of this public offering. Which of the following represents a viable defense?
A. The investor has not proven CPA negligence.
B. The CPA detected the misstatement after the audit report date.C. The misstatement is immaterial in the overall context of the financial statements.
D. The investor did not rely upon the financial statement.

C. The misstatement is immaterial in the overall context of the financial statements.

(this multiple choice question has been scrambled)

Which of the following is a correct statement related to CPA legal liability under common law?
A. CPAs are normally liable to their clients, the shareholders, for either ordinary or gross negligence.B. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.
C. CPAs may escape all personal liability through incorporation as a limited liability
corporation.
D. CPAs are guilty until they prove that they performed the audit with "good
faith."

B. CPAs are liable for either ordinary or gross negligence to identified third parties for whose benefit the audit was performed.

(this multiple choice question has been scrambled)

Under Section 10 of the 1934 Securities Exchange Act auditors are liable to security
purchasers for:
A. Auditors have no liability to security purchasers under this act.
B. Ordinary negligence.C. Existence of scienter.
D. Lack of due diligence.

C. Existence of scienter.

Require the client to prove scienter (intent to deceive, manipulate, or defraud) on the part of the auditors.

(this multiple choice question has been scrambled)

Jones, CPA, is in court defending himself against a lawsuit filed under the 1933
Securities Act. The charges have been filed by purchasers of securities covered under that act. If the purchasers prove their required elements, in general Jones will have to prove that:
A. He is not guilty of gross negligence.
B. The plaintiffs did not show him to be negligent.
C. He performed the audit with good faith.D. He performed the audit with due diligence.

D. He performed the audit with due diligence.

(this multiple choice question has been scrambled)

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would
eventually give the loan. Under the Restatement of Torts approach to liability
the auditor is generally liable to the bank which subsequently grants the loan for:
A. Lack of due diligence.
B. Lack of good faith.
C. Gross negligence, but not ordinary negligence.D. Either ordinary or gross negligence.

D. Either ordinary or gross negligence. (hard)

(this multiple choice question has been scrambled)

An auditor knew that the purpose of her audit was to render reasonable assurance on financial statements that were to be used for the application for a loan; the auditor did not know the identity of the bank that would
eventually give the loan. Under the foreseeable third party approach the auditor is generally liable to the bank which subsequently grants the loan for: A. Either ordinary or gross negligence.
B. Gross negligence, but not ordinary negligence.
C. Lack of good faith.
D. Lack of due diligence.

A. Either ordinary or gross negligence. (hard)

(this multiple choice question has been scrambled)

Which of the following forms of organization is most likely to protect the personal assets of any partner, or shareholder who has not been involved on an engagement resulting in litigation?
A. Partnership.
B. Subchapter M Incorporation.C. Limited liability partnership.
D. Professional corporation.

C. Limited liability partnership.

(this multiple choice question has been scrambled)

Under which common law approach are auditors most likely to be held liable for
ordinary negligence to a "reasonably foreseeable" third party?
A. Due Diligence Approach.
B. Ultramares Approach.
C. Restatement of Torts Approach.D. Rosenblum Approach.